August 20, 2020
After the S&P 500’s record run, UBS says look here for the next stock winners
Critical information for the U.S. trading day
By Barbara Kollmeyer
Don’t look in the obvious spots.
(Getty Images)
A red flag from the Federal Reserve is jarring investors a little, in a week that has delivered milestones for stocks.
Global stocks slipped after the Fed released the minutes of its latest policy meeting late on Wednesday. “In summary, the minutes described a weakened economy on uncertain footing with few viable policy options at this juncture,” Michael O’Rourke, chief market strategist at JonesTrading, told clients.
Rattling investors in particular was the view that the Fed appeared to take one option — yield curve control — off the table. Under that policy, the central bank would commit to buying bonds if a specific yield was breached. The idea that the Fed will keep buying big assets can help shore up stock prices, hence some disappointment is showing up this morning.
Or maybe those record runs
for the S&P 500 (SPX) and the Nasdaq Composite (COMP) have inspired some to take cash off the table. Our call of the day from a team of strategists led by Mark Haefele, chief investment officer for UBS Global Wealth Management, says don’t fear that circa 51% rally for the S&P 500 since the post-COVID-low in March.
“We see the equity rally as driven primarily by central bank policies of adding unprecedented
liquidity to markets through renewed quantitative easing and ultralow rates,” says Haefele, who expects central banks to stay in “stimulus mode for the foreseeable future” — supportive for stocks and other perceived riskier assets. But investors will need to think harder about where to invest.
He expects the “most attractive returns in the next phase of the recovery to be in portions of the market that have lagged behind so far.” That means investors with hefty exposure to equities that have been driving big gains lately, such as big U.S. technology names — Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Netflix (NFLX) and Google’s parent Alphabet (GOOGL) — may want to “rebalance into other opportunities.
“We see particular upside for companies involved in 5G and other enabling technologies. In addition, as the global recovery gradually takes hold, the next leg up in the market may be driven by cheaper sectors that have trailed behind in the rebound, such as cyclical and value stocks,” Haefele tells clients in a note.
And he sees U.S. midcap stocks as “poised to regain lost ground as the economic recovery gains traction and broadens out.”
Smaller companies tend to perform better in a recovery as they are more cyclical.
Looking at the measure of midcap stock performance, the SPDR S&P 500 ETF trust (SPY) is up about 4.7% year to date against a 6% drop for the SPDR S&P Midcap-400 ETF Trust (MDY).
As ETF.com points out, midcap stocks led a market recovery after the 1997 Asian financial crisis, the 2000 dot-com bubble, and the 2008-09 financial crisis.
The market
Dow (YM00), S&P (ES00) and Nasdaq (NQ00) futures are under pressure, with losses for European(XX:SXXP) and Asian markets. Gold (GC00) is sliding and the dollar (DXY) is up.
The chart
Time to love Europe stocks a little less?
The buzz
Weekly jobless claims are ahead and economists are looking for another decline. The Philadelphia Federal Reserve manufacturing index and leading economic indicators are also coming.
Shares of China’s e-commerce giant Alibaba (BABA) are sliding after results.
Shares of Intel (INTC) are climbing after the chip maker announced plans for a hefty stock buyback. Shares of rival Nvidia are slipping even after record revenue.
Unfathomable a few months ago, home-rental company Airbnb is planning an initial public offering.
Makeup giant Estee Lauder (EL) will lay off up to 2,000 after posting a loss.
A China official says recently postponed trade talks are back on.
Sen. Kamala Harris officially accepted the Democratic Party’s nomination for vice president at the its virtual convention, where former President Barack Obama slammed the current administration.
